US stocks are declining as Wall Street debates whether this bear market rally has finally come to an end. With the exception of an inflation-fueled ISM Services index, it should be relatively on the data front until Friday’s one-two punch of PPI and the University of Michigan report.
Many traders are wondering if next week’s Fed decision will be the last one with a rate hike. Fed fund futures expect a 50bps increase on December 14th and the February 1st meeting remains a toss-up between a 25 bp increase or one last half-point increase. Inflation will likely prove to be stickier and with the service part of the economy refusing to weaken. The risks that the Fed might need to do more remain elevated and that is why this economy needs to head to a recession. This next recession however won’t be rescued by quick Fed easing or a fiscal response as that will fuel inflation risks.
The ISM services index unexpectedly improved in November, with a slight decrease in prices paid. This report could suggest wage pressures will remain strong. The headline index printed at 56.6, much better than the estimate of 53.3, while prices only softened from 70.7 to 70.0. The employment component also rebounded back to expansion territory. Good economic news is bad news for stocks as it will keep the risk elevated that rates might have to end up higher later next year.
Bitcoin’s earlier gains evaporated after a hot ISM services report fueled bets that the Fed could tighten much more than markets are currently pricing. The crypto headlines haven’t been too surprising as they focus on how much money was loaned out and will likely be lost. It is fascinating to see how resilient bitcoin has performed over the last few days, but a sustained move higher seems unlikely.
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